Taking charge of cash sales

Like most grain farmers, Ray Gaesser of Corning, Iowa, used to sell the majority of his corn and soybeans with forward contracts. Not anymore. Today he hedges about two thirds of both crops with futures, still selling about a third on contract. The reason?

"I guess what happened to VeraSun last year," he says, referring to the bankruptcy of the nation's largest ethanol company. "It doesn't matter whether it's an ethanol plant or a local elevator, there's still a lot of risk."

The bankruptcy of VeraSun Energy allowed the company to walk away from forward contracts that appeared favorable to farmers when they originally sold their grain. And when a grain elevator fails, only a few states, including Iowa, have indemnity funds to protect farmers with forward contracts. Even those don't cover all of the contracted price, and there are delays in getting paid.

Watching both elevators and ethanol struggle as the economy headed into recession gave Gaesser enough heartburn to increase his hedging.

Besides the risk associated with forward contracts, Gaesser has 3 other main reasons for using futures contracts more.

As futures prices soared in 2008, local cash prices lagged into an abnormally wide basis. So there was less opportunity to profit from forward contracts.

By hedging on his own, Gaesser has more than one choice for delivering his crops for a spot price. That allows him a chance to shop around for a better basis.

With futures contracts, he can roll to another year or exit, depending on market conditions.

In essence, Gaesser is now doing the hedging that an elevator might do for him when it buys grain from a farmer on a contract for delivery in the future. But don't get the impression that hedging on your own makes you a rugged-individualist loner. It's just the opposite.

Like most grain farmers, Ray Gaesser of Corning, Iowa, used to sell the majority of his corn and soybeans with forward contracts. Not anymore. Today he hedges about two thirds of both crops with futures, still selling about a third on contract. The reason?

Because it usually has a better basis, Gaesser still delivers his corn to an ethanol plant in Corning that's part of the network owned or operated by POET Energy in Sioux Falls, South Dakota.